The European Banking Federation (the "FBE") is the united voice of the banks of the European Union and European Free Trade Association countries. It represents more than 4,000 individual banks, a number of which would be subject to the insider lending provisions of Section 13(k) of the Securities Exchange Act of 1934, as added by Section 402 of the Sarbanes-Oxley Act of 2002 (the "Act"). The FBE wishes to thank the Securities and Exchange Commission (the "Commission") for the opportunity to comment on the Proposed Rule on Foreign Bank Exemption from the Insider Lending Prohibition of Exchange Act Section 13(k) (the "Proposed Rule").

A. Background

Section 13(k) of the Securities Exchange Act of 1934, as added by Section 402 of the Act, prohibits both domestic and foreign issuers from making or arranging for loans to their directors and executive officers unless the loans fall within the scope of the exemptions specified therein. One of these exemptions permits certain insider lending by a bank or other depository institution that is insured under the Federal Deposit Insurance Act. However, foreign banks whose securities are registered with the Commission are not eligible for the bank exemption under Section 13(k). According to the Commission, the proposed rule would remedy this disparate treatment of foreign banks by exempting from Section 13(k)'s insider lending prohibition those foreign banks that meet specified criteria similar to those that qualify domestic banks for this statutory exemption.

As you may remember, in our previous correspondence1 we referred, among other issues, to Section 402 of the Act. The FBE had then voiced serious concerns that this Section prohibits loans to directors and executive officers while granting an exemption applying only to U.S. banks subject to the insider lending regulations including Regulation O of the Federal Reserve Board. The FBE conviction has always been that EU Member States use an array of equally effective methods and means, to avoid a conflict of interest in the process of granting loans to executives of the lender. Thus, to safeguard national treatment and to prevent conflicts of legislations, the FBE had invited the SEC to provide a blanket exemption for European banks because of the functional equivalence of their home country rules with Regulation O, applying to U.S. banks. The FBE also endorsed the proposal promoted by the Institute of International Bankers and stipulating that banks from countries which, according to a determination by the Federal Reserve Board, provide comprehensive consolidated supervision ("CCS") over their banking institutions ("approved CCS Countries") should be exempt from the lending prohibition of Section 402.

B. The CCS condition: only one CCS determination per jurisdiction should be necessary

We note that the Commission proposal would require that a foreign bank itself has obtained a CCS determination, while soliciting comment on whether originating from a jurisdiction that has received a favourable CCS determination suffices to qualify a foreign bank for the exemption. The Federal Reserve Board issues CCS determinations when it approves applications by international banks to expand their banking operations in the United States, and in practice nowadays when an international bank is being certified as a financial holding company ("FHC") under the Gramm-Leach-Bliley Act.

A favourable CCS determination affirms that "the foreign bank and any foreign bank parent are subject to comprehensive supervision or regulation on a consolidated basis by their home country supervisor". It thus relates almost exclusively to the quality of the supervision exercised by home country supervisors and not to individual banks applying for it. One can safely assert that the supervisor of one country exercises the same standard of supervision and regulation to all banks falling within its competence. This is the reason for which one CCS determination per country is sufficient.

C. The home country insider lending restriction condition should be revisited

Paragraph (b) (2) (i-iii) of the Proposed Rule seems to require that the loan be made pursuant to home country laws or regulations that allow personal loans to directors and executive officers only on one or more of the three following conditions:

(1) that insider loans be on market terms (i.e., substantially the same terms as those prevailing at the time for comparable transactions by the foreign bank with other persons who are not executive officers, directors or employees of the foreign bank or its parent); or

(2) that insider loans not on market terms be made pursuant to a benefit or compensation program that is widely available to the employees of the foreign bank or its parent and does not give preference to executive officers or directors over employees; or

(3) that insider loans be made following the express approval of the loan by the bank supervisor in the foreign bank's home jurisdiction.

We note that the first two of the three insider lending requirements included in the Commission's proposal are widely based on U.S. insider lending restrictions contained in the Federal Reserve Board's Regulation O. Thus, this paragraph could be read as requiring not only that any exempted loan actually be on such terms, but that the law or regulations of a foreign sovereign state permit director or executive officer loans only on such terms.

Different states may choose to address the safety and soundness issues related to insider lending in different ways. It is thus unclear to us why the proposal would require that the foregoing restrictions be mandatory under applicable laws or regulations of the foreign bank's home jurisdiction.

As the Commission has solicited comment on this issue, we would suggest that it revises this wording so that the three specific insider-lending requirements could be met without regard to whether they are required by applicable home country laws or regulations. This could be achieved simply by deleting the introductory text of paragraph (b) (2)2, and by replacing it with the wording "The loan is made:".

D. The threshold of $500,000 should be abandoned

The Commission proposal further requires for the exemption of loans exceeding $500,000 (either individually or aggregated with earlier loans to the same person) prior majority approval of the loan by the foreign bank's board of directors, the loan's intended recipient abstaining from the relevant vote. The Commission's release clarifies that foreign banks with a two-tiered board structure may obtain approval of a loan by either the management board or the supervisory board (so long as the borrower abstains from the vote).

We understand that this condition copies Regulation O requirements that apply to U.S. banks. However, the $500,000 limit in Regulation O was established 20 years ago and has not been adjusted ever since to take inflation into account. As a result, in most cases - especially regarding housing loans - this threshold is too low, always triggering a board vote.

Loan thresholds triggering the obligation to have a board vote exist among EU Member States as well. De minimis exemptions from the obligation to have a board vote are also in place, e.g. regarding loans that do not exceed a percentage of the director's annual remuneration. By prescribing the $500,000 the Commission unjustifiably "exports" specific U.S. insider lending standards, not recognising that other jurisdictions may address the safety and soundness issues related to insider lending in different ways.

For the above reasons, the thresholds and overall conditions for a board vote in the foreign bank's country of origin should be respected.

E. The proposed amendment to Item 7.B.2 of Form 20-F should be dropped

The Proposed Rule suggests adding a requirement to Item 7.B.2 of Form 20-F, according to which foreign banks that are subject to the proposed rule would have to disclose the identity of the borrowing director, executive officer or other related party, who are receiving "problematic" and other non-market term loans. We are of the firm opinion that such a far-reaching disclosure requirement would neither be mandated by U.S. norms nor provide the accommodation for differing relevant norms in European countries that is so necessary for the maintenance of strong transatlantic business ties. First of all, Section 13(k) of the Securities Exchange Act and Regulation O do not require public disclosure of personal loan amounts and names of individual executive officers. Secondly, European norms, including customer confidentiality principles and data protection laws, could be infringed by the proposed disclosure requirement. Thus, the laudable effort by the SEC to avoid through its Proposed Rule conflicts of legislations for foreign banks subject to Section 402 of the Sarbanes-Oxley Act would be called into question as the suggested disclosure requirement could reintroduce such conflicts. May we therefore respectfully ask the SEC to drop the suggested amendment to Item 7.B.2 of Form 20-F.

We are conscious of the great amount of time the SEC staff has been devoting to this issue - despite its other numerous competing priorities - and are indeed very grateful for it. Please do not hesitate to contact the undersigned if we can provide further information or assistance.

This letter is copied to the U.S. Treasury Department, the Federal Reserve Board and the European Commission.

The laws or regulations of the foreign bank's home jurisdiction restrict the foreign bank from making loans to its executive officers and directors or those of its parent company unless the foreign bank is permitted to and does extend the loan.